Phosphagenics Emerges Strongly From Fraud Cloud

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After the shock of the Ogru case, Phosphagenics has done its level best to refocus and restructure its business. The company can demonstrate that demand for both TPM and Vital ET is increasing, and that it is well-positioned for the future - notwithstanding the change in development path for the TPM oxymorphone patch.

Biotech stocks are used to a wild ride on the stock market – but this was not for the usual reason, of success or failure in a clinical trial. In July 2013, biotech company Phosphagenics Limited (POH) alerted the stock exchange that “invoicing and accounting irregularities” had occurred in its business. The share price started to fall immediately, but that was only the start of Phosphagenics’ purgatory.

In November 2014, its high-flying former chief executive officer, Esra Ogru, was sentenced to six years in jail for creating an elaborate system of fake invoices and credit card claims to defraud the company of $6 million, in a fraud that took place over nine years, between 2004 and 2013.

It was an amazing story. Ogru, along with her two co-accused, Robert Gianello and Woei-Jia Jiang, pleaded guilty to the fraud, which took place over nine years between 2004 and 2013. Ogru was the main beneficiary, taking in $4 million. Until 2008, Ogru’s activity was classic fraud: she was simply funding an affluent lifestyle. But when her first daughter was born with a normally fatal genetic condition in May 2008, the biochemist began to tie her activity in with trying to find a cure: she persuaded a court to authorise an untried treatment that saved her daughter's life, although severe brain damage remained.

Money from Phosphagenics was funnelled to manufacturing the novel drug. Ogru facilitated further development of the treatment, including setting up a new company from which she stood to profit from future successes. Trials of the drug have gone on to save the lives of 12 other babies with a similar condition.

Initially, founder Harry Rosen stepped in as chief executive, to start the rebuild of the company. In January 2015 Ross Murdoch, a former senior vice-president at Shire Pharmaceuticals, was appointed. Murdoch has started the hard work of bringing the focus of the market back on to Phosphagenics’ platform technology – but the share price is down 87% since news of the fraud broke. Phosphagenics is now capitalised at $21 million.

Phosphagenics’ proprietary drug delivery platform technology is called Targeted Penetration Matrix, or TPM. It allows drugs to be absorbed through the skin, or orally. Based on Vitamin E, the TPM phosphate technology has been applied to a number of different products across the pharmaceutical, animal health and cosmetics sectors. In November 2014 Phosphagenics raised $19.3 million of fresh capital, to be spent on putting its two leading TPM products, oxymorphone and oxycodone patches used for pain relief, through phase two clinical trials. The company said it would seek a meeting with the United States drug regulator to discuss the design of the trials.

Both patches are designed to improve the duration of pain relief, drug delivery and side effect profile compared to the existing oral forms of the drugs. The TPM oxycodone patch Phase 2 clinical trial began in February 2015 in Australia. It is a proof-of-concept study examining the use of an oxycodone patch for the relief of local pain in post-herpetic neuralgia, a nerve pain caused by shingles.

Topical delivery through the TPM patch allows oxycodone to interact with opioid receptors in the skin, enabling effective pain relief. At the moment there are no topical opioid patches approved by the FDA to treat peripheral (including neuropathic) pain in humans, so this represents a unique and valuable opportunity: Phosphagenics expects to complete the trial by the end of 2015.

While that trial is proceeding smoothly, in May Phosphagenics announced the completion of a review of its TPM oxymorphone patch development program, using specialist external consultants. On the back of previously announced clinical trial results showing that the TPM oxymorphone patch can deliver blood levels of oxymorphone corresponding to the therapeutic levels seen with oral dosing, a further three critical path non-clinical studies have been completed. These studies assessed the “development and commercial readiness” of the patches made during the recently completed technical transfer process: the review of these non-clinical trials concluded that additional specialised formulation work will need to be completed before the patch can be progressed further in the clinic. Phosphagenics has engaged an external group with expertise in patch development for this process.

This reformulation is expected to delay the lodgement of an Investigational New Drug (IND) application and Phase 2 trial planned for the USA by more than 12 months.

Phosphagenics is also reviewing successful results received in October 2014 from an acne trial examining the effectiveness of its TPM Tretinoin topical gel formulation in the treatment of acne. The study demonstrated that the TPM technology provides a topical tretinoin formulation with several key advantages in overcoming limitations of the market’s leading topical formulation for acne, Retin-A.

Phosphagenics’ major earner is its Vital ET raw tocopheryl phosphate, a supercharged form of Vitamin E used as an ingredient in the personal care industry. POH’s distributor Ashland Inc. markets Vital ET as a bio-functional form of Vitamin E for use as an ingredient in personal care product formulations, mainly in hair-care products. In 2014 Phosphagenics sold more than $1.5 million worth of Vital ET – up from less than $300,000 in 2013 – which made up most of its total revenue of $2.5 million (up 85 per cent). But the company does not make a profit.

However, Phosphagenics has decided to sell its BioElixia branded range of skin care and body care products, which was established in 2011 to market the company’s consumer products for national and international beauty markets. The range was developed with natural vitamins, anti-aging ingredients, and uses the patented TPM delivery technology. The ingredients were specifically chosen to work in synergy with each other to hydrate and nourish the skin and fight the visible signs of aging, cellulite, and stretch marks. The global distribution and marketing of BioElixia products began in December 2011, and products have been sold in Australia, Asia, the US, the UK and Canada.

The company is still committed to finding other revenue streams for the TPM technology. Last year both Novartis India and Themis Medicare both launched a diclofenac topical gel that uses it: Novartis branded its product Voveran TPM Gel and Themis Medicare branded its product Instanac TPM gel. Diclofenac gel is a non-steroidal anti-inflammatory drug, or NSAID: Voltaren gel is a diclofenac topical gel.) This was the first pharmaceutical product with TPM-enhanced formulations to be commercialised.

Phosphagenics has an existing commercial arrangement with global pharmaceutical company Mylan in relation to an antibiotic injectable: TPM acts to enhance the solubilisation of the drug. Mylan inherited this arrangement when it took over an Indian company: POH hopes that progress towards commercialisation of this product will accelerate this year. A successful commercialisation in this case would highlight the opportunity to exploit the use of TPM for a whole range of other injectables.

In March, POH signed a four-year exclusive licensing deal with Integrated Animal Health (IAH), which will make and sell animal nutrition products incorporating TPM. The products, which will be marketed under IAH Feed-Mate brand, target reductions in the signs associated with mastitis in dairy cows, and are intended to decrease antibiotic use and increase the quality of milk. The products are also believed to provide general improvements to herd health associated with heat stress and fertility difficulties. The licence applies to the United Kingdom and Ireland; IAH already has a licensing arrangement for these products in Australia and New Zealand.

The focus in this turnaround year is establishing TPM through good results in both the human and animal therapeutic markets, but further out, Phosphagenics wants to prove that TPM is a product with attributes far more valuable to partners and customers than simply a more efficient way to provide Vitamin E.

After the shock of the Ogru case, Phosphagenics has done its level best to refocus and restructure its business. The company can demonstrate that demand for both TPM and Vital ET is increasing, and that it is well-positioned for the future – notwithstanding the change in development path for the TPM oxymorphone patch. POH remains in a strong cash position with about $16 million cash at hand, and with a 2014 R&D refund of $2.5 million expected in the near term. Phosphagenics has turned its business around – now for the share price.

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au